The Massachusetts Supreme Judicial Court’s recent ruling in U.S. Bank v. Ibanez is the latest and loudest salvo in what may be the most engaging and gruesome legal aspect of the credit crisis yet: The day of reckoning for the staggering sloppiness that infected virtually every step of the mortgage-securitization process.
Ibanez held that, according to well-established Massachusetts precedent, a mortgagee cannot foreclose unless — surprise, surprise — it actually isthe mortgagee, or a legitimate assignee thereof. In Ibanez, lenders or servicers had foreclosed mortgages prior to completing (or commencing) the process of taking assignment of the note and mortgage on which they foreclosed. When they later sought to clear title, Massachusetts courts balked. “Utter carelessness,” Justice Cordy scolded the plaintiffs.
This is potentially a huge problem for mortgage servicers (among others), given the long and convoluted chains of title through which mortgages may have passed in order to create mortgage-backed securities (MBS). Not surprisingly, many observers are apoplectic, warning that this will lead to the end of the financial markets as we know them.
How did this happen?
There are probably several answers, but I think one is that the elite financial services sector (EFSS) that created the MBS is (or believes itself to be) a unique institutional force, unchallengeable by the ordinary legal or political mechanisms that keep institutions in check. It is immune from the rules and norms that apply to the rest of us. But we know that spoilt children often lack discipline, so persistent failures of scrutiny have led inevitably to failures of competence. The drip, drip, drip of deregulation left us with firms that are not only too big to fail: they’re also too big to succeed.
What will happen next?